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Pushing back on Bounce Back loan fraud

Author: ICAEW Insights

Published: 06 Apr 2022

ICAEW’s Emily Seiorse and Alex Russell describe a common scenario around fraud in COVID-19 support schemes, and explain how auditors can maximise the likelihood of fraud detection.

Last year, ICAEW’s Audit & Assurance Faculty published the guide Fraud and government support – a guide for auditors and ICAEW warned that fraud in COVID-19 support schemes could reach billions. Indications in 2022 are that billions of pounds of taxpayers’ money have indeed been lost to fraud and error.

Last month, ICAEW wrote a new article entitled COVID-support fraud: staying vigilant on the frontline, urging accountancy firms to stay alert to COVID-related fraud, including around the Bounce Back Loan Scheme (BBLS).

BBLS was part of the government support scheme to help businesses impacted by the pandemic, and was provided for business purposes only. Between £2k and 25% of turnover could be borrowed, up to a maximum of £50k.

The following real-life example describes an issue ICAEW members have discussed with ICAEW’s Technical Advisory Service (TAS) helpline.

An audited entity received a Bounce Back Loan of the maximum amount of £50k, but had overstated its turnover in order to borrow this amount. 

Before the pandemic, the entity’s turnover was in the region of £70k to 80k, so this was a substantial overstatement.

The entity’s auditor asked for more supporting documentation relating to the loan application, and noted that the client had used bank statements with large balances as evidence for the income. A review of the statements in the months before the application was made revealed that the director had transferred large sums of money, which had been repaid by the company before the year end.

The auditor spoke to the client about the application process for the loan and the client said that the loan would be repaid and therefore there was no issue. 

The auditor explained that the entity was not entitled to the loan because it did not meet the criteria and that the loan should therefore be classified as a current liability in the financial statements. The client eventually agreed to show the loan in this way.

However, the auditor also called the ICAEW’s ethics helpline operated by TAS to discuss their concerns. 

The auditor was suspicious that there had been a crime with proceeds. ICAEW’s TAS concurred and advised that the firm needed to make a Suspicious Activity Report (SAR) to the National Crime Agency (NCA). 

TAS also advised that the firm consider the relationship with the client going forward.

As the Audit and Assurance Faculty’s guide notes: “Auditors must remain professionally sceptical throughout the audit and be alert for inaccurate or misleading information provided by management. This applies regardless of past experience of the honesty and integrity of management … COVID-19 may have created new and additional pressures on management compared to prior years.”

Engagement team discussions under ISA (UK) 240 (The Auditor’s Responsibility Relating to Fraud in an Audit of Financial Statements) need to discuss how and where financial statements may be susceptible to material misstatement due to fraud, including how fraud might occur. Framing discussions around the three corners of the ‘fraud triangle’ – opportunity; pressure, motivation, and incentives; and rationalisation – can be helpful.

All auditors are also now required under ISA (UK) 700 (Forming an Opinion and Reporting on Financial Statements) to report on the extent to which their audit was capable of detecting irregularities, including fraud. ICAEW’s Audit and Assurance Faculty’s guides on How to report on irregularities in the auditor’s report may be helpful in this respect.

Emily Seiorse is a Professional Consultant in ICAEW’s Technical Advisory Service and Alex Russell is a Technical Manager in ICAEW’s Audit and Assurance Faculty.

The Technical Advisory Service is available to ICAEW members, affiliated, ICAEW students and staff in eligible firms with member firm access and can be reached by phone on +44 (0)1908 258 250 (Option 2) or via our Webchat service.

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